Why Modern Monetary Theory Is a Dicey Bet for Liberals

A couple of weeks ago Alice Marshall responded to some of the criticisms I made of Modern Monetary Theory (MMT) a few months back. Her post is a good summary of both what I agree with about Modern Monetary Theory and my reservations. In fact, these few sentences put both in a nutshell:

Taxes do not finance government expenditure at the federal level. That alone is reason to embrace MMT. If it explains the world as it is, and I put it to you that it does, than we should use it as a basis for public policy.

I agree 100% with the first two sentences, which cover the monetary theory part of Modern Monetary Theory. Modern Monetary Theory can and should be used against those who call for austerity because we (allegedly) have no money. As I wrote earlier, though, I don’t think a successful effort would end the call for cuts in government spending:

The people who oppose policy like a job guarantee do not do so because they haven’t been introduced to a sufficiently persuasive economic model. They do so because they are ideologically opposed to federal social programs, and if you take away their current argument (“because no money”) they will just substitute it with the next handiest one (“because inflation”). But that’s not a legitimate problem, you say? No it isn’t. Neither is insolvency. Has that deterred them so far?

Still, succeeding would make those who used the “we’re broke” excuse look foolish, and that would have political consequences. As I concluded before, that seems like a tall enough order by itself.

So far, so good. It’s the extension of Modern Monetary Theory beyond monetary theory where I start to have reservations. Using Modern Monetary Theory as the basis for public policy is tricky because in addition to justifying liberal priorities like funding safety net programs or a job guarantee, it can also be used for neoliberal ends like slashing taxes and eliminating the minimum wage. When Modern Monetary Theory stops being a monetary theory, vague notions like “public purpose” and “productive capacity” come into play. Marshall admits we already have Modern Monetary Theory for big banks, as evidenced by the bailout and other extraordinary measures. Who is to say public purpose hasn’t been served by that? Who’s to say there isn’t an abundance of productive capacity bottled up in our entrepreneurial job creators just waiting to be unleashed by the elimination of the capital gains tax?

Nothing about Modern Monetary Theory is inherently just or equitable. It is, as Alice says, just a description of the way the world works – which is why I don’t really understand liberals putting a whole lot of time or energy into it. If one’s priority is the establishment (or protection) of just and equitable policies, Modern Monetary Theory is a terrible place to start. Every bit of time and effort getting it broadly accepted will get you precisely zero percent closer to those goals.

There isn’t a single founder of Modern Monetary Theory or a canonical text. Everything beyond that initial monetary theory is up for grabs. I’ve cited people presented as authorities on the subject only to be told they weren’t really MMT. But since there isn’t a single definitive source on how Modern Monetary Theory defines its non-monetary theory terms, that can be an argument against any objection. No one is MMT – or everyone is.

Those on the left tend to fall back on a sort of “MMT plus” formulation, as Alice does: “Speaking only for myself, I consider increasing taxes on the rich as necessary for preserving democracy.” Right, because Modern Monetary Theory can be used to justify cutting taxes, and whoever wins the battle for the soul of MMT will get to decide just how liberal – or neoliberal – it will be in practice. Which side would you bet on, particularly if it starts to be taken seriously? Political and economic elites have a pretty good track record of co-opting movements. One that has the enormous wiggle room of Modern Monetary Theory’s non-monetary theory components could be immediately put in their service, without even a brief period of progressive utility.

That’s why I think it is better to make the case for liberal policy up front, instead of obscuring it behind a Rorschach test presented as a monetary theory. Make the case for a job or income guarantee, or better funding of social programs, or what have you, make that case directly. If anyone asks how to pay for it, MMT. But lead by arguing in terms of justice and equity. Modern Monetary Theory is the details, and details belong in the background.

Why Modern Monetary Theory is a dicey bet for liberals

A couple of weeks ago Alice Marshall responded to some of the criticisms I made of Modern Monetary Theory (MMT) a few months back. Her post is a good summary of both what I agree with about Modern Monetary Theory and my reservations. In fact, these few sentences put both in a nutshell:

Taxes do not finance government expenditure at the federal level. That alone is reason to embrace MMT. If it explains the world as it is, and I put it to you that it does, than we should use it as a basis for public policy.

I agree 100% with the first two sentences, which cover the monetary theory part of Modern Monetary Theory. Modern Monetary Theory can and should be used against those who call for austerity because we (allegedly) have no money. As I wrote earlier, though, I don’t think a successful effort would end the call for cuts in government spending:

The people who oppose policy like a job guarantee do not do so because they haven’t been introduced to a sufficiently persuasive economic model. They do so because they are ideologically opposed to federal social programs, and if you take away their current argument (“because no money”) they will just substitute it with the next handiest one (“because inflation”). But that’s not a legitimate problem, you say? No it isn’t. Neither is insolvency. Has that deterred them so far?

Still, succeeding would make those who used the “we’re broke” excuse look foolish, and that would have political consequences. As I concluded before, that seems like a tall enough order by itself.

So far, so good. It’s the extension of Modern Monetary Theory beyond monetary theory where I start to have reservations. Using Modern Monetary Theory as the basis for public policy is tricky because in addition to justifying liberal priorities like funding safety net programs or a job guarantee, it can also be used for neoliberal ends like slashing taxes and eliminating the minimum wage. When Modern Monetary Theory stops being a monetary theory, vague notions like “public purpose” and “productive capacity” come into play. Marshall admits we already have Modern Monetary Theory for big banks, as evidenced by the bailout and other extraordinary measures. Who is to say public purpose hasn’t been served by that? Who’s to say there isn’t an abundance of productive capacity bottled up in our entrepreneurial job creators just waiting to be unleashed by the elimination of the capital gains tax?

Nothing about Modern Monetary Theory is inherently just or equitable. It is, as Alice says, just a description of the way the world works – which is why I don’t really understand liberals putting a whole lot of time or energy into it. If one’s priority is the establishment (or protection) of just and equitable policies, Modern Monetary Theory is a terrible place to start. Every bit of time and effort getting it broadly accepted will get you precisely zero percent closer to those goals.

There isn’t a single founder of Modern Monetary Theory or a canonical text. Everything beyond that initial monetary theory is up for grabs. I’ve cited people presented as authorities on the subject only to be told they weren’t really MMT. But since there isn’t a single definitive source on how Modern Monetary Theory defines its non-monetary theory terms, that can be an argument against any objection. No one is MMT – or everyone is.

Those on the left tend to fall back on a sort of “MMT plus” formulation, as Alice does: “Speaking only for myself, I consider increasing taxes on the rich as necessary for preserving democracy.” Right, because Modern Monetary Theory can be used to justify cutting taxes, and whoever wins the battle for the soul of MMT will get to decide just how liberal – or neoliberal – it will be in practice. Which side would you bet on, particularly if it starts to be taken seriously? Political and economic elites have a pretty good track record of co-opting movements. One that has the enormous wiggle room of Modern Monetary Theory’s non-monetary theory components could be immediately put in their service, without even a brief period of progressive utility.

That’s why I think it is better to make the case for liberal policy up front, instead of obscuring it behind a Rorschach test presented as a monetary theory. Make the case for a job or income guarantee, or better funding of social programs, or what have you, make that case directly. If anyone asks how to pay for it, MMT. But lead by arguing in terms of justice and equity. Modern Monetary Theory is the details, and details belong in the background.